Surge or purge Merge or purge?

After rallying around 90% from its June bottom of $880, Ethereum’s native token Ether ( -ETH) is now not immune to downside risks in September.

The Merge is a technical upgrade that will make Ethereum a proof of stake (PoS) network. It is scheduled for Sep. 15 .

Ether trades at 70% below its record high of $4,950 in November 2021, despite making impressive gains between June-September. It is possible that it will fall further.

Weekly chart of the ETH/USD exchange rate. Source: TradingView

These are three Ether bearish indicators that indicate why more downside is possible.

The Ethereum Merge news is now available

Ethereum options traders expect Ether to rise to $2,200 from the $1,540 level it is at before the Merge, according to to Deribit data compiled and compiled by Glassnode. Many see Ether reaching $5,000. However, enthusiasm is low after the PoS switch.

After the Merge, traders seem to want downside protection. This is indicated by an “options implied volatility smile” (OIVS) metric.

OIVS shows the implied volatility of options with different strikes depending on the expiration date. Contracts made out of capital tend to have higher implied volatility, and vice versa.

In Ether’s Sept. 30, options expiry chart, below, traders can see how the smile’s steepness helps them assess the relative price of options and determine what type of tail risk the market is pricing.

Ethereum OIVS for the contract expiring on Sept. 30, 2022. Source: Glassnode

It shows a significant buy-side demand to purchase ETH call options that expire in September. This is indicated by the volatility smile’s upward slope. This indicates traders are willing and able to pay a premium to have a longer exposure.

Glassnode analysts stated that “Post Merge the left tail is pricing significantly higher implied volatility,” indicating traders are paying more for’sell the-news’ put option protection post-Merge. They cited the OIVS chart below, which also includes Call and Put open interest at different strike rates.

Ethereum OIVS for the contract expiring on Oct. 28, 2022. Source: Glassnode

In other words, ETH traders are hedging in the event of a sellthe-news event.

Hawkish Federal Reserve

Ethereum’s exposure to macroeconomic events (mainly quantitative tightening at the Federal Reserve) has more downside risks.

Last week, Fed Chairman Jerome Powell reaffirmed central bank’s commitment to curbing inflation. He also stated that he and his associates would likely increase interest rates by 0.5% to 0.75% at their September policy meeting.

The ETH/USD pair has been hit hard by rate hikes in recent months. This is due to the increasing positive correlation between a wider crypto sector and traditional risk-on indicators against the prospect of decreasing cash liquidity. As of September 3, the daily correlation coefficient between ETH/Nadaq was 0.85.

ETH/USD and Nasdaq daily correlation coefficient. Source: TradingView

The possibility of Ether falling alongside riskier assets is very high, especially if the Fed increases by 0.75%.

The giant Ether “bear banner”

Technically speaking, Ether paints as a bear flag in its weekly chart.

When the price consolidates higher within an ascending parallel channel following a strong downward move, bear flags are present. These occur when the price breaks out from the channel to the downside. Technical analysis rules dictate that the price falls as far as the length of the previous downtrend (flagpole).

This week, Ether used the lower trendline of the bear flag as support. The Ethereum token can either bounce back to test the flag’s higher trendline at $2,500 or fall below the lower trendline in order to maintain its bearish trend.

Related: The Merge price outlook for ETH: Bullish or Bearish? TheChartGuys interview

The factors mentioned above suggest that the ETH/USD pair could enter the bear flag stage in September. As illustrated in the chart below.

ETH/USD weekly price chart featuring ‘bear flag’ setup. Source: TradingView

Therefore, ETH’s bear-flag profit target for 2022 is near $540, which is approximately 65% less than the price of Sept 3.

These views and opinions are the author’s and do not necessarily reflect those of You should do your research before making any investment or trading decision.

Opinion writer on 7trade7